” ‘…if they could get trapped in this sort of deflationary stagnation then it could happen to us.’ Sure enough, it did.”

When one of the participants in the discussion doesn’t notice that he has contradicted himself three paragraphs on, perhaps that is the best indication why macro is in worse state now than it was in 1958?

Well, have you got Prof. K’s phone number? I don’t, unfortunately.

No, this isn’t my reading. My reading is that Krugman is saying that the truncation of the wage distribution is what is showing that we have recession/depression. In the preceding paragraph, he brings up someone like James Bullard, who thinks that we don’t have a lot of economic slack. So Krugman is explaining why that view is wrong, that unemployment is cyclical not structural, and therefore we should be doing a lot more to eliminate it.

The minimum wage is obviously a factor in wage stickiness, but “not the clearest thing he’s ever said” would be something of an understatement if workers getting a very modest increase in their nominal wage due to an increase in the minimum wage were what Krugman meant by “a lot” of people “literally getting zero wage change” or for that matter “people don’t like to cut … wages.”

PK: It has become much more apparent that downward nominal rigidity—not just stickiness but people don’t like to cut nominal prices and wages—is a very significant factor. When you have a depressed economy in a state of initially low inflation the zero bound not just on interest rates but on wage changes becomes a really big deal. Again, more San Francisco Fed stuff: they have tried to back out how many people are literally getting zero wage change. The answer is: “a lot”. That suggests….

You may be right. It’s a bit obscure, as Prof. Quggin notes at 32. My reading was that mass impoverishment meant that a rising average wage represented actual rises only among the not-impoverished, ie. that the “average” isn’t in this case a good measure of what is going on for most people. The distribution is strongly skewed, so that the
“average” number doesn’t tell you much. But the big deal is the mass impoverishment, without which a rise in the average wage would actually be a good thing, indicating good National economic health.

Your reading is, I think, that if mass impoverishment was even worse than it already is (because of people taking wage cuts) there wouldn’t have been any rise in the “average” wage number, so that wage movement as an index of economic health would then unambiguously have shown recession/depression.

But on either reading, I still think Prof. K’s “truncated the left edge of the distribution” is remarkably cold-blooded. I suppose I won’t hold it against him too much; it’s a technical argument for a technical audience, and he has pointed to impoverishment often enough in other places. I think he should have pointed to it at the Conference, too. There are people there with blood on their hands, and they should be told so.

OK, so >0 means worth doing, not >1, which thus has no salience unless one has other prejudices which lead to opposing any degree of ‘crowding out’ at all, ‘on principle’, correct?

But even then (and without accepting that a private-sector fetish should be catered to at all, particularly in constructing econ. theory), isn’t the multiplier still an all-things-considered thing, so that looked at in detail, the effects of spending whose multiplier ends up being 1 could still include some crowding out component, just not a big enough one to drive the multiplier below one overall?

Assuming that’s right, then if one has an overriding aversion to government ‘getting in the way of business’ to any extent at all, a multiplier value of >1 still won’t guarantee that the spending plan in question is acceptable, though <1 will apparently be sufficient to make it unacceptable (is there really no realistic, not-gratuitously-wasteful, way of ending up with a multiplier <1 without crowding out being involved?).

There’s been talk about the work of Valerie Ramey, and how her work supports the conclusion that fiscal stimulus won’t work (or is a bad idea), so I’ve been trying to understand what she said last Sunday as reported by Delong. I find her reaching this conclusion:

Thus to answer one of Brad’s questions, yes, the government could adopt a policy that would quickly reduce unemployment: large-scale military conscription. If the problem is with employment rates for young males, this is a great way to do something about that, but I don’t think anybody thinks that policy would be welfare-improving.

First, let’s ignore the qualifier about young males, because we all know that we have females in the US armed forces, and I do seem to recall that when I registered for the draft 35 year olds were still draftable. While 35 is obviously quite young, surely we could draft 50 year olds for clerical positions.

Second, I don’t see that it would make any difference if people chose to sign up in exchange for good pay rather than being conscripted, it would still get them out of the pool of job seekers.

Third, I don’t see that it would make a difference if people were to join, say, the National Park Service and get a dark green uniform rather than the Marines and get a blotchy uniform.

So isn’t this an agreement that increased government spending certainly could bring down unemployment?

Then she goes on to say:

I think a key structural reform that would significantly help the economy—the labor market and also the long-run budget deficit—would be to reform the health-care sector.

One of the problems of health care in the US is that we are spending more and getting less. Suppose we were to replace our inefficient private sector health care system with a more efficient single payer government system – and let’s suppose we get equally good results while spending only 70% as much (because we’ve eliminated that 30% in overhead imposed by the private system).

Doesn’t that mean that by increasing government spending by 70 cents we’ve eliminated (crowded out?) 100 cents of private spending? Doesn’t that give us a net reduction in GDP of 30 cents, and thus a negative multiplier? So while she thinks increasing government spending is a bad idea because the multiplier might only be a positive .5, she favors policies having a multiplier of negative .3?

1. Sorry, everyone, I meant to type $35/day. Also sorry for derailing my own thread. SJ’s point is valid if you look at PPP adjustments for GDP/person, since a lower wage share will increase measured purchasing power, but not the PP of workers. But, if we look directly at incomes, as in this case, PPP works fine (at least in this respect).

2. Crowding out implies a multiplier between 0 and 1. Complete crowding out implies a multiplier of zero. That doesn’t mean the money was wasted, just that public expenditure has displaced an equal amount of private

3. NZ started with a very low target (1-2 per cent IIRC), had disastrous results and raised the target. The ground lost then, relative to Oz, has never been regained, though.

I’m just going to quote Bruce Wilder from the fiscal multiplier thread, which still makes a lot of sense to me, and which is what I was trying to get at. This is BW’s #31 (01.04.13 at 6:21 pm):

“The multiplier is the ratio of the incremental government expenditure to the expected or resulting increase in national income. If the government borrows an additional $1 from me, private citizen, and I spend $1 less (since I lent it to the government), at the same time as the government spends the additional $1 it borrowed, national income (the total expenditure on production in the economy) hasn’t changed. Hence, a multiplier of zero.”

Maybe “crowding out” refers to something else, but in JQ in the same post suggests that crowding out implies at least that the multiplier is < 1.

Gotchaye@16: Wouldn’t “crowding out” imply a multiplier of 0? As in: the govt. spends $100, which *if the govt. had not spent it* would have been spent by some private actor. With exactly the same effects etc. So govt. spending has no net effect.

$100 * 0 = 0, so there’s a net loss of $100 in that scenario – equivalent to setting your $100 bill on fire.

It seems to me Krugman’s above quoted passage on ‘expectations’ is really the core flaw with a monetary solution. As an investor when I see “0%” interest rates I don’t think “gee we must be in a great economy lets do projects” I see we’re in a lousy economy with lots of uncertainty – better hunker down.

That then implies a fiscal approach has a better chance of success – if indeed there is a macro response that can provide some cure.

The difficulty I find with fiscal solutions, particularly for an economy that is already borrowing to fund spending is a matter of degree – $1T of incremental spending is only an 8% additional to a $15T economy multiplelier or not…considering borrowing is already running >$1T annually to simply fund existing spending (very little of which is directly stimulative) .

High levels of borrowing heavily influence expectations about future taxation, which in turn doesn’t foster an environment conducive to capital investment. This isn’t “crowding out” in the literal sense, more an expectations theory of current economic actions.

Bottom line, in my view, is we’re in relatively uncharted territory for macro response. Like a complex disease I’m doubtful that a ‘silver bullet’ response would be as effective as a ‘cocktail’ response…so would sooner see policy conducted using multiple mid-sized vector than making big bets on one theory or another.

What in the world are you talking about? If my haircuts cost less because labor costs are lower, that most certainly helps lower my cost of living. Now of course this also implies that certain workers may be paid less, but that’s the whole point of the comparison! You take median wages and then apply the appropriate PPP adjustment as best you can to really see which country is doing better. It might be a high cost, high wage economy or a low cost, low wage economy and you are trying to find the answer! Depending on the particular basket of goods that any given consumer wants, some PPP adjustments will work better than others but there are two points to make here: 1) Services are 70% of GDP so PPP matters a lot and 2) even internationally traded goods like phones and cars have different prices in different local markets.